Bitter Pill Indeed – Answering with a Call to Action

This month Time Magazine published their longest article in the magazine’s history – ~27,000 characters.  I downloaded it from their site and printed it out (double sided of course) and it was 30 pages:  “Bitter Pill:  Why Medical Bills Are Killing Us” written by Steven Brill.  I haven’t read an article on the landscape of healthcare that has been this thought provoking since Atul Gawande’s expose on McAllen Texas in the New Yorker.  For anyone that is of the mind that there are quick fixes or easy answers to reducing the rising costs in healthcare, I invite you to find a comfy chair, a nice cup of coffee, and devote some time to reading both of these pieces.

One overriding theme of these articles is that, although there are significant market forces at work in healthcare, it is any place but a “free market.”  There is little to no transparency around costs, which prevents some of the most important actors in the market from having the information necessary to act in their own self-interest.  What we have instead are significant incentives across the value chain to maximize profit at every turn leaving the under-insured and the non-insured to be the most vulnerable.

Certainly, the goal of healthcare reform is to address some of these issues, but as Brill points out, the majority of the impact of health care legislation is going to only address the “edges of the core problem.”

Interestingly, one of the risks that Brill identifies as a result of healthcare reform is the consolidation of providers – especially hospitals, labs, and imaging centers – and the corresponding impact this would have on payer’s negotiating power.  Here’s the logic:

  • Hospitals leverage a “chargemaster” to establish rates for all services that they provide – there are no standards to these charges, and they can be as high as 200% + more than the actual rates reimbursed by Medicare  – which, by law are reimbursed at cost.  One of the many examples Brill provides:  Chargemaster charge for a “TROPONIN I” for $199.50, was reimbursed by Medicare for $13.94.
  • Understanding that Medicare reimbursement rates are at cost, private healthcare payers have traditionally worked to negotiate reimbursement rates with hospitals UP from the Medicare rates at a range of 30%-50%.
  • However – as providers consolidate, increasing bargaining power and geographical dominance, payers are having to negotiate off of the Chargemaster rates.  Brill noted that Edward Wardell, a lawyer for Aetna Inc., said “we hate to negotiate off of the chargemaster, but we have to do it a lot now.” 
  • The point is that the ability of payers to negotiate from a rational basis for cost is going to be increasingly difficult – it’s the difference between negotiating up from cost, or negotiating down from drastically inflated rates.

So, if you’re an executive or corporate development resource at a payer (even more-so if you’re small to mid-size), it’s time to seriously look at your M&A options and strategies.  Whether you look to increase your bargaining power through acquiring other payers, or you are looking to new models of provider reimbursement through the development of integrated delivery networks or accountable care organizations, you need to be doing something. The time is now to act, before the ability to effectively negotiate from a rational position goes the way of the chargemaster.  Bitter pill indeed.

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